Why World Worries About Russia's Natural Gas Pipeline
(Bloomberg) -- A planned new natural-gas pipeline into Europe from Russia is shaking up geopolitics. Nord Stream 2, as it’s called, worries leaders in Eastern Europe, has stirred the ire of U.S. President Donald Trump and has put German Chancellor Angela Merkel on the hot seat.
1. What is Nord Stream 2?
It’s a planned new 1,230-kilometer (764-mile) undersea pipeline that will carry natural gas from fields in Russia to the EU network at Germany’s Baltic coast. It will double the capacity of an existing undersea route -- the original Nord Stream -- that opened in 2011. Russia’s Gazprom PJSC owns the project, with Royal Dutch Shell Plc and four other investors including Germany’s Uniper SE and Wintershall AG providing half of the 9.5 billion-euro ($11 billion) in cost.
2. How close is it to being built?
A Swiss unit of Gazprom, Nord Stream 2 AG, has received environmental and construction permits from Germany, Finland and Sweden but has had trouble getting similar approvals from Denmark. (The pipeline would cross the economic zones of those four nations, plus Russia’s.) The company may reroute the line away from Danish waters, eliminating the final legal hurdle. Dredging work has already started, and the company plans to begin putting sections of pipe on the seabed in the next few weeks. It’s due to be complete in late 2019, a target that looks "optimistic," according to Bloomberg Intelligence analysts Rob Barnett and Elchin Mammadov.
3. What’s the point?
Before Nord Stream, Russia was sending about two-thirds of its natural gas exports to Europe through pipelines in Ukraine, a nation with which it has had tense relations since the Soviet Union collapsed. That left Gazprom exposed to disruptions, such as the pricing dispute with Ukraine that prompted Russian leaders to halt gas flows for 13 days in 2009. Since then, relations between the two countries have worsened, culminating in the Ukrainian popular revolt that kicked out their pro-Russian president and led to Russia seizing the Crimean Peninsula. The Nord Stream projects are just one part of Gazprom’s decades-long efforts to diversify its export options to Europe. Russia expects European gas demand to increase as some nations move away from nuclear and coal power and as their domestic gas production decreases.
4. What’s the worry?
Countries that sit between Russia and Germany collect transit fees on the natural gas that flows through their territories. Those nations include Ukraine, Poland and Slovakia. They’re worried both that they will lose revenue and that Nord Stream 2 gives Russia the ability to bypass them completely in times of political friction. Lithuania’s president, Dalia Grybauskaite, said her nation has always viewed Nord Stream 2 "as geopolitical, politically motivated, having no economic justification and also binding hands for some European countries to pursue a free energy policy." This all comes as Europe’s relations with Russia are at their lowest point in decades, with the government of Russian President Vladimir Putin accused of meddling in elections in the U.S. and Europe and carrying out assassinations and attempted hits in Britain.
5. Why is the U.S. involved?
A group of 39 U.S. senators said in March that Nord Stream 2 would make American allies “more susceptible to Moscow’s coercion and malign influence.” On July 11, before a meeting with NATO Secretary General Jens Stoltenberg, Trump said Germany had made itself "captive to Russia" by "getting so much of its energy" from there. After a subsequent meeting with Putin, Trump vowed to compete for Europe’s gas market. Nine days later, after striking an in-person deal with European Commission President Jean-Claude Juncker over threatened tariffs, Trump said the EU would become a “massive buyer” of U.S. LNG.
6. Could the U.S. really compete with Russia for the EU market?
That would be a stretch. Gas from the U.S. must be chilled into a liquid and shipped in tankers at a great cost. Russia’s supplies mostly arrive in Europe through a network of pipelines that have been in place for decades -- and at a much lower price. U.S. gas is more likely to end up in Latin America, which is closer, or in Asia, where prices are higher (though China’s planned 25 percent tariff on U.S. LNG may close that avenue).
7. Does Germany rely on Russia’s energy too much?
It’s true that Germany is heavily dependent on imported fossil fuel, and one of its other sources of gas -- the Netherlands -- is drying up fast. Russia supplied roughly 46 percent of Germany’s gas and 59 percent of its oil in 2017, according to Bloomberg calculations based on customs data from Moscow. (Those numbers don’t take into account trades between EU countries of oil and gas that originated in Russia.) Trump may be exaggerating when he says Germany could rely on Russia for up to 70 percent of its energy once Nord Stream 2 is operational. But he’s right that Germany spends billions on Russia’s energy. Last year, that amounted to almost $22 billion, according to Russian customs.
8. How do Russia and Germany respond to the criticism?
Putin has said Trump’s complaints are motivated by his wish to promote "the interests of his business" to sell American liquefied natural gas to Europe. Merkel has defended the "economic aspects" of Nord Stream 2 and says she’s determined to make sure Ukraine isn’t "fully cut off from transit traffic." After Trump’s comments at the NATO meeting, Germany’s defense minister, Ursula von der Leyen responded in a BBC interview, "We have an independent energy supply, we are an independent country, we are just diversifying.”
The Reference Shelf
- A QuickTake explainer on how Russia’s grip on gas shapes Europe’s energy politics.
- The Nord Stream 2 website.
- Did Trump’s attack on Nord Stream 2 distort natural-gas markets?
- Europe may disappoint Trump if he really expects it to be a "massive buyer" of U.S. LNG.
- Why Dutch natural gas production is dropping so precipitously.
©2018 Bloomberg L.P.